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Tax department issues clarifications on 1% TDS on crypto transactions
The Central Board of Direct Taxes on Wednesday clarified that in a peer to peer (direct buyer to seller) transaction of virtual digital assets, the buyer—the person paying the consideration—would be required to deduct 1% tax under section 194S of the Income-tax Act.
Finance Act 2022 inserted a new section 194S in the Income-tax Act, 1961, with effect from 1st July 2022.
The new section mandates that a person paying by way of virtual digital assets (VDAs) or crypto assets to deduct tax deducted at source (TDS) at the rate of 1% of the consideration.
However, while the Finance Act 2022 has brought in clarity concerning the levy of income tax on crypto assets, there was some confusion over the application on TDS on crypto transactions.
According to the circular, since the threshold of ₹50,000 (or ₹10,000) is with respect to the financial year, calculation of consideration for transfer of VDA triggering deduction shall be counted from 1 April 2022.
The circular highlighted that if the crypto transaction is taking place on or through an exchange there is a possibility of tax deduction requirement under section 194S at multiple stages.
“Largely the responsibility to deduct the TDS and the compliance burden has been increased for the exchanges. They have to maintain their entire transaction trail and disclose these transactions in their income tax returns. So, broadly exchanges have to enter into the contractual agreements with the brokers or the customers wherein they can deduct the TDSm which the buyer is supposed to deduct," said Yeeshu Sehgal, head of tax markets at AKM Global, a tax and consulting firm.
The tax department clarified that in a case where the transfer of VDA takes place on or through an exchange and the asset being transferred is owned by a person other than the exchange transferred, either directly or through a broker, tax may be deducted only by the exchange, which is crediting or making payment to the seller.
“In a case where broker owns the VDA, it is the broker who is the seller. Hence, the amount of consideration being credited or paid to the broker by the exchange is also subject to tax deduction under section 194S of the Act," the circular said.
Further, where the credit/payment between exchange and the seller is through a broker (and the broker is not seller), the responsibility to deduct tax will be on both the exchange and the broker.
In situations where the consideration is in kind or in exchange of another VDA or partly in kind and cash is not sufficient to meet the TDS liability, the person responsible for paying such consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration.
Further, if one VDA is being exchanged with another, both the persons are buyer as well as seller need to pay tax with respect to transfer of VDA and show the evidence to other so that VDAs can then be exchanged.
Keep in mind that as per the taxation provisions, if the deductee does not furnish his PAN to the deductor, the TDS shall be deducted at the rate of 20% as prescribed under Section 206AA.
Further, no TDS is applicable if the payer is a specified person (an individual or Hindu Undivided Family (HUF), who is not subject to tax audit) and aggregate value of consideration is less than ₹50,000 during the financial year. In other cases, no TDS is applicable if the consideration does not exceed ₹10,000 in aggregate during a financial year.
